Penn National Lays Down The Law And The Cash On Mini Casinos

The company bid a staggering $50.1 million for the license. It allows them to build a mini casino in a specified location within 10 miles the Borough of Yoe in York County. The precise location will not be known until Penn National submits the full application for the license.

Each mini casino license allows the operator to build a facility with up to750 slot machines. An additional $2.5 million gives them a license to add table games as well.

In yesterday’s auction, only four bidders took part, although all existing Category 1 and 2 license holders were eligible.

Penn National’s bid was massively above the minimum price the state demands for a Cat 4 license, which is $7.5 million. The apparent overbid takes some understanding to know if this will create consequences for other states looking at gambling expansion.

Why bid so much?

So does Penn’s bid represent a revaluation of the license value, implying that other operators will have to come up with similar sized bids to secure their own licenses? Or is this some form of ego trip designed for PR impact?

Existing laws maintain a 25-mile buffer zone between any one casino and its nearest permitted neighbor. However, there are no neighboring casinos within the Hollywood’s buffer zone.

Penn National recently launched a lawsuit alleging that the Category 4 licensing process breaches its rights. It contends the new mini casinos will be a major threat to Hollywood, where two-thirds of customers come from outside the 25-mile exclusion zone.

Penn’s argument against the mini casinos

As such, Penn is not in favor of building any new mini casinos. It argues that it will suffer more than its competitors.

Speaking to OnlinePokerReport, Penn National Senior Vice President for Public Affairs, Eric Schippers explained:

“We’re happy to be the winning bidder. However, as reflected by our pending Federal lawsuit against the Cat4 provisions in the Gaming Act, we’re not happy to have to be in the situation of paying this much to help protect our flank at Hollywood Casino.

The Gaming Act put us in the perverse position of having to essentially bid against ourselves to protect our market share in Central Pennsylvania. Nonetheless, we think the area we’ve selected will provide us the best opportunity to play both defense and offense in terms of maximizing our combined investment in Pennsylvania and we’ll be seeking to generate incremental value for our shareholders.”

In other words, Penn chose the York County location because it prevents another casino from building a competing facility near Hollywood. At the same time, it also allows Penn National to extend its market reach with minimal cannibalization of its existing customer base.

The $50 million was spent buying benefits over and above those created by the new licenses. Even if Penn chooses not to build a new mini casino, the money could still be considered a good investment.

Good locations for mini casinos will be in short supply

The auction was the first of ten scheduled for the available licenses. The auctions sequence the licenses to give bidders priority on their preferred location. If a competitor wins a license and announces they will build in the location desired by another bidder, then that bidder would have to find another location or give up the chase.

Over 40 percent of Pennsylvania’s municipalities opted out of the opportunity to have a mini casino located in their area. As a result, optimum locations may be in short supply.

Other states won’t get the same benefits as Pennsylvania

The auction process enabled Pennsylvania to receive massively more than it expected for the first Cat 4 gaming license. That would normally encourage other US states seeking to expand gambling to use the same auction strategy.

However, the unique factors which caused Penn National to pay so much are unlikely to hold in other regions.

It is unlikely that any of the subsequent auctions will produce a similar high bid. Although to make certain of their preferred location some of the bidders might still offer two or three times the $7.5 million minimum.